Unintended Consequences: Why Everything You've Been Told About the Economy Is Wrong [Hardcover]

Edward Conard (Author)

Book Description

Release date: June 7, 2012

In the aftermath of the Financial Crisis, many com­monly held beliefs have emerged to explain its cause. Conventional wisdom blames Wall Street and the mortgage industry for using low down pay­ments, teaser rates, and other predatory tactics to seduce unsuspecting home owners into assuming mortgages they couldn’t afford. It blames average Americans for borrowing recklessly and spend­ing too much. And it blames the tax policies and deregulatory environment of the Reagan and Bush administrations for encouraging reckless risk taking by wealthy individuals and financial institutions.

 

But according to Unintended Consequences, the conventional wisdom masks the real causes of our economic disruption and puts us at risk of facing a slew of unintended—and potentially dangerous—consequences. This book addresses many essential but overlooked questions, such as:

 

• If the United States had become a nation of reckless consumers rather than investors, why did productivity soar in the years leading up to the meltdown?
• If predatory bankers took advantage of home owners, why did down payments decline, thereby shifting risk from home owners to lenders?
• If the risks were easy to spot, why did top politi­cal and financial advisers encourage lenders to make unsound investments?
• If new regulations encourage banks to hold enough capital to fund withdrawals and not just loan losses, how will the economy underwrite the risks necessary to reach full employment?

In an attempt to set the record straight and fill the void left by other analysts, Conard presents a fas­cinating and contrarian case for how the economy really works, what went wrong over the past decade, and what steps we can take to start growing again.

To read an excerpt from Unintended Consequences, please visit http://www.edwardconard.com/book-excerpt
For up-to-date information on everything related to Unintended Consequences, visit www.edwardconard.com

Editorial Reviews

Review

"Refreshing, at a time when so many take the failure of capitalism for granted, to read a bravado defense of the greatest force for wealth creation that the world has ever known."

—BRIAN CARNEY The Wall Street Journal

“Edward Conard’s book presents the most cogent and persuasive analysis of the financial crisis to date. It is deeper and likely more accurate than what we have seen so far from journalists, academics, and particularly former government officials.”
—ANDREI SHLEIFER, 1999 John Bates Clark Medal winner; Former Editor, Quarterly Journal of Economics; Professor of Economics, Harvard University

“Edward Conard’s keen business insight and sharp eye on economic forces explain structural strengths and weaknesses of the American economy. While some of his proposed solutions are controversial, the U.S. economy can recover its mojo if policy makers understand Conard’s diagnosis.”
—GLENN HUBBARD, Dean, Graduate School of Business, Columbia University; Former Chairman, President’s Council of Economic Advisers

 

“Edward Conard provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.”

 —NOURIEL ROUBINI, Chairman, Roubini Global Economics

 

“Unintended Consequences will be the most talked about economic book in 2012. When Ed Conard points the spotlight at recent economic history, his uncanny ability to cut through the confusion provides something totally unexpected: a fresh, nonpartisan perspective on what is right and wrong with America.”

—KEVIN HASSETT, Senior Fellow and Director of Economic Policy, American Enterprise Institute

 

“Edward Conard has written a provocative and important book about the economy that challenges conventional wisdom about the financial crisis, the trade deficit, government policy, and the path to prosperity. I hope policy makers and business leaders will pay close attention to Conard’s framework.”

—WILLIAM A. SAHLMAN, Senior Associate Dean, Harvard Business School

 

“Virtually everyone who reads Unintended Consequences will feel the pain of knowing that we may never get EVERYONE to read it. The clarity of Edward Conard’s explana­tion of where we are, how we got here, and what we do now is profound.”

—BILL BAIN, Founder, Bain & Company

 

 “There are an amazing number of good ideas and interesting points made in this book. The thinking underlying it, and the obvious depth of understanding of the author, are very impressive.”

—STEVEN LEVITT, Coauthor of Freakonomics; 2004 John Bates Clark Medal Winner

 

“This is a wonderful book, filled with wisdom by a guy who really knows what he’s talking bout. It is a must reading for both businessmen and politicians.”

—JOHN C. WHITEHEAD, Former Chairman, Goldman Sachs & Co.; Former Deputy Secretary of State

"Conard's contrarian chapter on the benefits of low taxation for the rich is powerfully written. It should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved."

—The New Republic

About the Author

Edward Conard was a partner at Bain Capital from 1993 to 2007. He served as the head of Bain’s New York office and led the firm’s acquisi­tions of large industrial companies. He sits on several boards of directors including the boards of Waters Corporation and Sensata Technologies. Prior to Bain, Conard worked for Wasserstein Perella, an investment bank that specialized in mergers and acquisitions, and Bain & Company, a management consulting firm, where he headed its industrial practice. He is a graduate of Harvard Business School and the Uni­versity of Michigan.

For more information, visit www.edwardconard.com

Become a fan of Ed on Facebook: www.facebook.com/EdwardConard

 

Follow Ed on Twitter at @EdwardConard

Product Details

• Hardcover: 320 pages
• Publisher: Portfolio Hardcover; First Printing edition (June 7, 2012)
• Language: English
• ISBN-10: 1591845505
• ISBN-13: 978-1591845508
• Product Dimensions: 6.5 x 1.1 x 8.8 inches
• Shipping Weight: 1.2 pounds (View shipping rates and policies)
• Average Customer Review: 3.3 out of 5 stars  See all reviews (76 customer reviews)
• Amazon Best Sellers Rank: #59,242 in Books (See Top 100 in Books)

Most Helpful Customer Reviews

29 of 33 people found the following review helpful

4.0 out of 5 stars Good Ideas That Are Not Popular Concepts of the Markets August 19, 2012

By Sean Lannan

Format:Hardcover

Edward Conard has good ideas and themes. But, his thought process is scattered and he makes many unsubstantiated statements that do not come together to create a complete model of markets and applied economics. I liked the list facts/myths on the Financial Crisis (2007-9) that Mr. Conrad listed toward the end of his book.

THEME: Capital markets play an important role in underwriting of risk (equities) and distributing risk to risk takers (equity investors and sellers of insurance) that increases productivity and economic growth. Underwriting risk is easier in economies with large, liquid capital markets. Efficiently priced insurance reduces the risk of moral hazard and reduces the risk of panic-driven withdrawals of short-term deposits. Successful risk-taking creates equity which can be consumed or reinvested. Prudent risk-taking is a good for society. Risk properly priced in the market leads to higher employment and greater wealth creation than when risk is mispriced (asset bubbles) which wastes investment dollars and leads to inappropriate decision making on investment/consumption. Society as a whole captures 100% of the benefit of investments: 1) Investors capture about 30% of the total value. 2) Consumers capture 70% of the total value. 3) Government redistributes some of the benefits. As an economy becomes richer, it is willing to take more risks.
Commerce is the salvation of the poor. Prosperity of a society has the greatest impact on the plight of the poor.

THEME: Financial panics and capital withdrawals cannot be accurately predicted. Government guarantees provide effective counter-measures to these unforeseen events. Government guarantees (properly priced) is the cheapest way to insure against panic and financial crises. Effectively priced government guarantees minimize moral hazard and create a better environment for markets to stimulate growth, create jobs and create wealth. Counter-cyclical government spending reduces risk aversion in financial markets. Punishing financial institutions during panics (supposedly to reduce moral hazard) is destructive and too expensive for the economy compared to any possible benefit. Dodd-Frank Act increases the risk of future financial crises because it gives politicians more room to interfere in the economy.

THEME: Income redistribution hurts investors, provides negligible long-term benefit to the poor and marginally hurts/benefits the middle-class. Wealth and income redistribution from the successful to the less-well-off reduces innovation and economic growth. This hurts everyone. Governments redistribute income and wealth in society; but governments do not create wealth in society. The greater the proportion of GDP controlled by politicians and bureaucrats, the slower the economy grows and the lower long-term prosperity of the society. Government induced consumption hurts society by reducing the amount of investment and reducing the growth of productivity.

The majority of Americans favor income redistribution since they would be net beneficiaries in the short-term. Majority of Americans would pay a long-term price of lower standards of living over time.

THEME: Full employment is a sign that markets are working well and the structures and institutions that foster prudent risk taking enable efficient markets and wealth creation. Risk-taking is not genetic or cultural. The economic environment that encourages risk-taking must be nurtured. It can be easily abused and destroyed. Work is inherently a moral good for society (shares philosophy of Ayn Rand). Society benefits when individuals use their talents and energy to create products and services wanted by others. The contribution of employee labor is lost permanently when a person is unemployed. The hours they could have worked contributing to society is lost forever when they are unemployed. The lost hours never come back.

Labor unions create a tax on consumers and investors. Unions increase the costs of goods and services and reduce the return on investment as they seek rents while using the threat of disruption to organizations.

Europe and Japan have high labor redeployment costs that push down productivity improvements and economic growth.

Myths from the Financial Crisis (2007-9): 1) There was predatory lending to hapless sub-prime borrowers. (Facts: The borrowers were the net beneficiaries.) 2) Fraudulent securitizations duped the majority of institutional investors. (Facts: Investors knew what they were buying. They just did not expect a 30% drop in the RE collateral behind the securities and the wipeout of the subordinated tranches.) 3) Regulatory arbitrage allowed financial institutions to commit fraud and transfer the losses to the public. (Facts: Pay structure of executives at financial institutions did not incentive this. 4) Financial panic, panicked withdrawals, market illiquidity, fire sale prices on forced liquidations destroyed capital base of many institutions.)

Facts from the Financial Crisis: 1) GSEs, aided by politicians pushing expansion of home ownership, helped create the environment for the over investment if sub-prime lending. 2) Risk-averse, short-term deposits from foreign investors were channeled into lending on sub-prime mortgages and other risky investments. 3) 30% collapse nationally for RE caused a run on the banks. 4) The federal government inflicted damage on markets and the economy by allowing the collapse of financial institutions such as Bear Stearns, Lehman Brothers and Washington Mutual.

144 of 189 people found the following review helpful

4.0 out of 5 stars Valuable even if you disagree with the author June 7, 2012

By Jackal

Format:Hardcover

This is a book written by a management consulting kind of guy. One key argument is that the wealthy class adds a lot of value to society because they invest money (as opposed to spend money). I think the author is half-right in this statement because risky equity capital is neither provided by the Fed, the banks nor small investors. However, it is only half-right, because the US economy is to some 70% driven by end-customer demand. If Americans lack purchasing power, new products will not be in much demand. Any thinking person would realise that total income inequality (one guy earning everything) or total income equality (everyone earning the same) would be pretty bad societies. The optimal level of inequality is not much discussed in this book. More seems better for the author. (Just as less seems better for economists Krugman and Stiglitz. It is a bit sad that we get just another book saying that more/less is better.)

The author wants to make an impact as a thought leader, but that will not happen for a couple of reasons:
- He is far too dogmatic in accepting market prices as unbiased. He seems to defend market prices in all situations, even when those markets are not very efficient. So while he rightly praises the highly paid IT or biotech entrepreneur, he also seems to praise all bankers. Somebody bought the subprime debt so some value must have been added, the author thinks. He does not take seriously the fact that some markets are seriously inefficient (e.g. banking salaries, CEO salaries, CDOs). Had he analysed the lack of efficiency in some markets, the book would have been much stronger.
- Sometimes it is more intelligent, both intellectually and impact-wise, to concede a few points. Eg: (1) The US government might have had something to do with the success of Intel and other companies due to huge government investments in R&D. (2) There are other kinds of motivation than money. Listen to what psychologists say about intrinsic motivation. Talk to some art students to find out what drives them.
- The author does not have sympathy for crappy bankers according to television interviews. So why not write that rent-seeking bankers should be sacked? The author is rich so he can afford to pick a few names and make some enemies. Instead he finds a way to support them by implicitly saying that they should not be punished because they took well-intended decisions. What? Capitalism should reward people based on results not intentions.
- Rather than just putting a lot of praise on private equity, what about acknowledging that the Fed's low interest rate policy makes it artificially profitable to do private equity deals? These funds can borrow at very low rates, which Joe the Plumber, who wants to expand his business, cannot do. Sure, the risk capitalists are rightly acting on the low cost of capital, but surely they don't deserve full credit when the price of capital is set by a monopolist (i.e. the Fed) and not the market place.
- The author also seems to hard-sell the book a bit too much. A lot of "friends" have given the book five stars on amazon without hardly having reviewed any other book. In fact, these "friends" have reviewed the ebook, but without actually buying the ebook (no "verified purchase" note). On the other hand some lefties give the book an instinctive one star. That is just as immature.
- He considers art history students as spoilt because they use their talent on something that is not adding a lot of value to society. Irrespective of the truth of that statement, it will not endear the author to anyone. Just as tone death as Romney talking about his money and. Art historians are grappling with a very complex subject in trying to understand what is good/beautiful art. In other words, the unit of measure is complex. Economics is a little bit more like art history than the author understands.

So why do I give the book four stars? Well, the book presents a lot of interesting analysis. The book is at times thoughtfully and intelligently written, but not consistently so. However, the book is not poorly written as many reviewers suggest. The first few chapters are a really great (and somewhat contrarian) description of key economic features of the US during the last 50 years. The book justly defends creative destruction which is an essential part of capitalism not just private equity. America has strong capitalist traditions, which have served the country well. What Bain Capital has done might not be pleasant, but creative destruction always has its losers. Still, it is part of American capitalism. The book is also fun because the author sometimes needlessly overstretches; sometimes you think that he is metaphorically out to hang himself. Had he not trashed the art history students, he could have learnt one or two things from them. Anyway, the fact that the author is tone death actually is something that I like personally.

If you are still undecided, have a look at Conard and Stiglitz having a five minute debate on a Bloomberg clip. The author has collected all media promotion clips on his webpage (thanks!). Even the one in which he subconsciously takes the role as a disobedient, smart schoolboy that eventually gets reined in by his teacher (Jon Stewart). No media training!

9 of 12 people found the following review helpful

4.0 out of 5 stars The role of governments in managing downturns, and specifically in managing THIS recession September 4, 2012

By M. Heiss

Format:Hardcover

Is there a role for government in economic downturns? Yes.

Can government make bad economies even worse? Also yes.

Conard looks at the factors in the current recession and makes recommendations.

He takes apart the FCIC report in an intelligent way, and almost in passing shows the reader that the FCIC overlooks the role of politicians in creating the anti-redlining, sub-prime housing boom. He return to this again, showing that politicians who continue to advocate for sub-prime lending to bad credit risks are part.of.the.problem. He also takes apart the "predatory lending" myth.

The book captures the importance of risk-taking and innovation in setting America's economy apart in the world. It shows how America's investments in innovation are oftenaccounted for on the balance sheet as SALARIES, and not as R&D, and why that matters. Human talent needs the potential payoff of high salaries and high status in order to continue to enter fields that demand intensive time and training (medicine, science research, engineering). Otherwise, you wind up with otherwise-bright young people deciding to major in fields that are useless, for the purposes of greater economic prosperity.

There is an important take-down of President Obama's stimulus around pages 227-239. Government COULD HAVE helped by incentivizing mosre risk-taking for investors, but the stimulus DID NOT HELP. The Stimulus was meant to increase consumption... but it failed. People are all-too aware that giant government spending programs today mean giant tax increases tomorrow, and tomorrow is getting nearer and nearer. In this recession, higher government spending has resulted in more risk-averse behavior on the part of investors -- paying down debt, increasing saving. It is hard to see any economic benefit from the almost-trillion dollar wasted Stimulus.

In today's political climate, the importance of welfare spending is clear. High welfare payments and vast wealth distribution amounts to paying the poor in order to quell civil unrest. How much better the situation would be if politicians focused on incentivizing risk taking in order to grow the economy, rather than paying off civilization's malcontents NOT to riot.